Accurate Prediction

In the drive to differentiate themselves from the pack and gain market leadership, consumer goods (CG) companies are looking to demand forecasting technology to add precision and responsiveness to their supply chains.

Demand forecasting technology helps CG companies gauge in advance how much product they will need to make, which in turn helps them manage raw-material supplies, inventory and distribution. Long considered an afterthought, demand forecasting is now gaining new attention among supply chain managers as they look for any available edge over the competition.

According to a December 2004 study published by Aberdeen Group, more than 85 percent of companies that have implemented demand management have experienced performance improvements, including a 4.7 percentage point increase in gross margins, a 24 percent gain in inventory turns and a 13 percentage point increase in forecast accuracy. Moreover, companies with best-in-class demand management performance outpaced their competitors by 12 percentage points in gross margin, 14 percentage points in inventory as a percentage of sales and 17 percentage points in forecast accuracy, the study says. According to the Aberdeen study, spreadsheet-based demand projections remain the "single most favored technology for demand forecasting." However, spreadsheet solutions can't provide the level of accuracy today's consumer goods companies need, Aberdeen says in the study.

A Wise Move One company that recently upgraded from a spreadsheet solution was Wise Foods, which implemented an on-demand supply-chain planning solution from JRG Inc. during a five-month period that lasted from December 2003 to May 2004.

"The problem is, you waste a lot of time and lose a lot of productivity with the old school way of doing things," says Mike Kopetski, director of Supply Chain for Wise Foods. One of the reasons Wise Foods stuck to the spreadsheet for so long was that technology companies hadn't created demand management tools that were financially viable for small and mid-size companies, Kopetski says. Wise Foods is a $400-million CG company, and only recently have technology providers like JRG created demand-management technology within its price range.

Demand forecasting enables Wise Foods to plan production for the future instead of just reacting to orders as they come in, Kopetski explains. For example, the company is able to take demand spikes from promotional activity into account when it is managing production and distribution. "You're always working on an emergency basis, the other way," Kopetski says. "This way, you're working in an organized, planning mode."

Better Alignment

Ventura Foods LLC was predominantly a make-to-order company, but a year-and-a-half ago it installed a demand-management solution from Terra Technology to better align its planning with its changing business needs. At the time, Ventura Foods was diversifying its product mix and customer base and was looking for a planning solution that could meet the needs of its rapidly changing business model, says Wayne Olson, director of Logistics for Ventura Foods. "We wanted to go out and look for a company that would differentiate us from our competitors," Olson says. "We were looking for something that fit our unique business needs with regards to planning."

With Terra Technology, Ventura Foods is significantly improving its planning in the one- to five-week time frame, Olson says. In the future, Ventura Foods will improve its demand forecasting methodology to a point were it can be a valuable tool for long-term business planning, Olson says. Using Terra Technology's forecast solution, Ventura Foods can do a better job of allocating labor and resources, Olson says. The technology is particularly useful when buying and allocating raw product, especially when market conditions create limited supplies of critical raw material components, he says.

Terra Technology's solution takes existing forecast data and refines it, making Ventura Foods' demand forecast more accurate, Olson says. The technology reduces "mean absolute percentage error" or MAPE, the standard by which the accuracy of forecasts is measured. In Ventura Foods' case, Terra Technology's solution reduced relative forecast error by 60 percent, Olson says.

Reaching Maturity

Overall, demand planning technology is a mature market, says Lora Cecere, research director for AMR Research, who specializes in supply chain issues. A recent survey of 200 companies conducted by AMR showed that 51 percent used demand planning technology, a relatively high level, she says. An additional 13 percent were implementing demand planning solutions, 10 percent were considering implementing the technology for the first time and 25 percent were not using the technology at all.

Companies that have been using demand planning for a while are now looking for ways to upgrade their forecasting technology, Cecere says. They are augmenting forecasts with point-of-sale data, deepening optimization categories and putting optimization and analytics together. Another trend in demand planning is demand shaping, Cecere says. Rather than just try to forecast what consumers will buy, the idea is to try to influence demand, using techniques such as promotion management, price management and product placement.